Commercial property brought into non resident CGT charge

HMRC has issued draft guidance for the extension of the non resident capital gains tax rules bringing commercial property and company disposals into scope for the first time from April 2019

The new rules go further than the existing capital gains tax (CGT) regimes applicable to non-residents - annual tax on enveloped dwellings (ATED) related CGT and non resident capital gains tax (NRCGT) - by including commercial as well as residential property, and extending the charge to cover all non-resident companies and indirect disposals.

From April 2019, the rules will apply to:

  • both commercial and residential property (previously just residential);
  • all non-residents (there used to be exceptions for certain non-close companies); and
  • indirect disposals (eg, sale of shares in a company that owns UK property).

It will still be necessary to distinguish between residential and commercial property for the purposes of applying the higher CGT rates to upper rate gains. In addition, non-resident companies will be brought within the charge to corporation tax, rather than CGT, in respect of chargeable gains.

The rules will be included in Finance Bill 2018-19, due to be enacted in this parliamentary session, following delays due to Brexit pressures on Commons time in the run-up to the Christmas parliamentary recess.

It also means that the current ATED CGT rules will be superseded from April 2019.

An HMRC spokesperson told Accountancy Daily: ‘This is draft guidance on the new rules relating to non-residents' gains on UK land as set out in the current Finance Bill. We are currently accepting comments and feedback with a deadline of 28 February.’

A disposal of an interest in UK land will be a direct disposal within the scope of the new rules.

An indirect disposal is where the disposal of interest involves rights to assets that derive at least 75% of their value from UK land.

Where the disposal is a direct disposal that gives rise to a residential property gain under Taxation of Chargeable Gains Act 1992 (TCGA 1992) Sch1B the gain would be chargeable at 18 or 28%.

For direct disposal of other UK land that rate would be 10 or 20%.

Where the disposal is an indirect disposal of any UK land the rate would be 10 or 20%.

When determining the rate of non-resident CGT for individuals, it is important to take into account in the same way as for UK residents the amount of income taxable in the UK or other gains to determine whether any part of an individual’s gains are taxed at the lower rate of 10/18% or higher 20/28%.

NRCGT is charged on the total chargeable NRCGT gains for a tax year after deducting certain allowable losses. The losses that may be set against NRCGT gains comprise any allowable losses accruing to the person in the tax year in question on direct and indirect disposals of UK land, plus any allowable losses accruing to the person in previous tax years.

Nimesh Shah, partner at Blick Rothenberg said: ‘The draft guidance is lengthy and highly technical, but this is a by-product of how complex the actual rules are.

‘Part of the reason why some of the more subjective aspects of the legislation are not covered in sufficient detail in the draft guidance could be because the guidance has to address all the various components of the rules. Including more commentary could result in the guidance becoming unworkable.  Again, it comes back to the original rules being incredibly complex and the resulting guidance cannot cover all the aspects in sufficient detail.’

Property richness test

The UK property richness test looks at whether 75% or more of the gross qualifying assets of the company being disposed of are UK land (see CG73922). Qualifying assets includes all of the assets of the company, apart from those matching related party liabilities (see CG73944). The value to use for the test is the market value of the assets at the date of disposal (see CG73950). The test is based on gross assets, so no liabilities are taken into account.

‘For the definition of 'property-rich' companies, HMRC said in the consultation response document (July 2018) that it would produce guidance setting out the level of due diligence required to determine whether a company is "property-rich",' Shah explained. 

‘The comment (at point 3.53) in the consultation response document was – ‘In many cases, it will be sufficient to look at a balance sheet or similar statement that represent recent valuations of the assets’. 

‘In the draft guidance, there does not appear to much in the way of “guidance” around this point and only one direct example. The expectation was that HMRC would be producing detailed guidance on this aspect, as it is one of the more subjective elements of the rules.

Temporary non-residents

There are also issues to consider for temporary non-residents.

If an individual makes a disposal in the overseas part of a split year or in a year when non-resident, any part of the gain on the disposal that is not chargeable to NRCGT may be caught by the temporary non-resident provisions and charged in the period of return.

For cases involving direct disposals of UK land the asset is not treated as fully residential before 6 April 2019 if in the period beginning 6 April 2015 (or acquisition if later) and ending 5 April 2019, there was no day on which the land consisted of or included a dwelling.

Where a company migrates to the UK and becomes resident after 5 April 2019, any previous entitlement to rebasing of the asset for the purposes of computing the gain on a disposal is preserved.

CG-APP14 Non-Resident Capital Gains Tax (NRCGT) from 6 April 2019 draft guidance issued 31 December 2018 

Collective investment vehicles

There are specific rules applying to non-UK residents making disposals of interests in collective investment vehicles and HMRC issued draft guidance for review on 3 January. From April 2019, all non-UK resident CIVs will be liable for non-resident capital gains tax.

This draft guidance explains how the rules in Schedule 5AAA apply to disposals of UK land by non-UK resident collective investment vehicles (CIVs), and to disposals of interests in ‘UK property rich’ CIVs by non-UK resident investors.

HMRC said it will ‘work with stakeholders to make further changes where required. The final version is likely to be split into smaller sections, and is expected to be included in a new HMRC Investment Funds Manual to be published in early 2019.

From April 2019, all non-UK resident CIVs are brought into charge, and areas of difficulty potentially arise for those CIVs under the core rules:

exempt investors would indirectly suffer tax where a CIV or entities that CIV is invested in become liable to tax on gains;

investors could indirectly suffer from multiple charges to tax on a CIV or entities that CIV is invested in (for example, where a gain arises for a special purpose vehicle in the fund structure disposing of a property, and again when the CIV disposes of an intermediate holding company above that SPV);  and

UK and non-resident investors would also be liable to tax on any gains on a disposal of their interest in the CIV.

CG-APP15 - Non-resident capital gains from 6 April 2019: Collective Investment Vehicles: draft guidance issued 3 January 2018

Report by Sara White

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